Invoice Coding in Accounts Payable: Best Practices

Invoice coding might seem like a small part of your overall Accounts Payable (AP) process, but when it’s done poorly, it can lead to major inefficiencies. Whether you’re a CFO trying to streamline operations or an AP clerk managing day-to-day invoices, mastering coding enables a complete process overhaul. 

Let’s discuss the essential best practices for AP invoice coding, the common challenges and benefits, and how you can automate this process—especially using tools like Dynamics 365 and ExFlow.

Key highlights:

• Invoice coding ensures that financial transactions are categorized correctly, improving reporting and decision-making while reducing inefficiencies such as misreporting and compliance issues.
• Common invoice coding issues include manual entry errors and inconsistent practices that lead to misclassification, delayed approvals, and difficulty tracking expenses.
• Standardizing coding structures, integrating with approval workflows, and leveraging automation tools like ExFlow can significantly reduce errors and streamline processing.
• Regularly reviewing and updating codes ensures they stay aligned with business needs and compliance requirements.

What Is AP Invoice Coding?

AP Invoice coding is the process of assigning the appropriate accounting codes (also known as GL codes) to an invoice so it’s properly categorized in your company’s accounting system. Essentially, it ensures that every financial transaction is recorded in the correct category, like office supplies, travel expenses, or contractor payments.

At a high level, you’ll break an invoice down into various elements, such as:

• Department (Marketing, Sales, IT)
• Expense type (Software, Office Supplies)
• Tax codes (if applicable)

Without accurate coding, you’ll face complications in tracking spending, adhering to budgets, and producing accurate financial reports, allowing for better decision-making and real-time insights into your organization’s financial health.

Common Invoice Coding Challenges

Despite its importance in invoice management, coding is prone to errors. Here are some of the most common pain points:

Key Invoicing Challenges	How They Impact Your Finance Team
Manual entry errors	Misreporting, missed payments, and accounting inconsistencies
Inconsistent coding practices	Difficulty in tracking expenses, budget oversights
Time-consuming data entry	Reduced team efficiency and delayed approvals
Lack of visibility in real-time data	Poor decision-making and delayed financial reports

For many companies, the invoice coding process takes up a disproportionate amount of time. It’s common to see errors like:

• Using the wrong expense codes.
• Delayed approvals due to missing data.
• Invoice misclassification, making reporting less accurate.

Without a standardized system in place, your AP team may struggle with inconsistency, which results in chaos during auditing or month-end close.

Invoice Coding Best Practices for Accounts Payable

You can significantly improve your manual coding process by adopting best practices that reduce errors, improve efficiency, and ultimately save time. Here are five key strategies to implement:

1. Create a Clear and Standardized Chart of Accounts

A well-structured chart of accounts is the foundation of an efficient coding system. The chart should be detailed enough to capture all expense categories but not so complex that it becomes overwhelming to manage. Every line item on an invoice should map to a specific account in your chart, making it easy to categorize, reconcile, and report financial data. By simplifying this process, you minimize the risk of errors and ensure that financial reporting remains accurate.

2. Standardize Your Coding Structure

Consistency is key, especially for larger organizations where multiple departments and individuals are involved in the AP process. A standardized coding structure ensures that everyone uses the same system, making it easier to process and audit invoices. 

For example, the coding used for office supplies or travel expenses should be the same across all departments. This not only reduces errors but also speeds up the approval process, as invoices are uniformly categorized.

3. Integrate Coding with Approval Workflows

Integrating coding into the approval workflows ensures that all invoices are properly categorized before they move on to payment, preventing last-minute changes or questions about how expenses should be classified. It also streamlines communication between departments, reducing the number of steps needed to approve an invoice. 

Workflow automation tools like ExFlow for Dynamics 365 can further enhance this process by automating routing, approvals, and coding at different stages of the workflow.

4. Leverage Process Automation

Automating your process is the most impactful step you can take to improve efficiency and reduce errors. Solutions like ExFlow allow you to automate coding by using vendor-specific rules, prior invoice data, and even machine learning. 

Automation reduces the manual workload on your team and ensures that invoices are coded accurately, in compliance with your financial policies. Ardent Partners notes that invoice exception rates have seen a sharp decline (to 14% in 2024), marking a major milestone for AP teams striving to enhance efficiency and play a more strategic role in their organizations. 

High exception rates—often caused by incorrect coding, incomplete data, approval delays, and missing purchase order details—have long been a burden on AP departments, consuming valuable time and resources. By reducing these exceptions, AP professionals can shift their focus away from manual troubleshooting and towards initiatives that drive greater financial oversight.

5. Regularly Review and Update Codes

As your business grows and evolves, your coding structure should do the same. Regular reviews of your chart of accounts and coding rules ensure that they stay aligned with your current operations. Whether you’re adding new departments, services, or expense categories, updating your coding system is critical to maintaining accurate financial records. 

Periodic reviews also help ensure that your automation tools are applying the correct codes and not relying on outdated data.

How to Automate Invoice Coding in Dynamics 365

The days of manually typing in GL codes for each invoice are gone—thanks to automation tools like Dynamics 365 and ExFlow. Here’s how you can automate your AP coding process and minimize errors:

1. Vendor Rules: Automatically apply specific GL codes based on vendors. For example, invoices from your office supplies vendor could always be coded to ‘Office Supplies Expense.’
2. Approval Flows: Invoices can automatically be routed through an approval flow where coding is verified before the final approval.
3. Automated Matching: Use automation to match purchase orders, invoices, and receipts, ensuring everything is aligned before posting.
4. Machine Learning: Advanced systems are incorporating machine learning to predict GL codes based on invoice content, further reducing manual efforts.

The Benefits of Automating Your Invoice Coding Process

Automating your coding doesn’t just save time—it ensures accuracy, reduces manual errors, and improves overall efficiency across your finance team. Below are key benefits you can expect:

• Faster Processing: Automated coding drastically cuts down the time spent on manual data capture. This means your team can process more invoices in less time, allowing them to focus on higher-value tasks.
• Minimized Errors: Human errors in manual data entry are a common source of problems, leading to coding mistakes and delays. Automation minimizes these risks by applying consistent, predefined rules.
• Improved Compliance: Automated invoice processing ensures invoices are coded according to your company’s policies and regulations, ensuring compliance with minimal oversight.
• Scalability: As your company grows, so will your number of invoices. Automation allows you to scale without hiring additional personnel, maintaining speed and accuracy as volume increases.

The graph below compares the efficiency gains before and after automating AP invoice coding. The gray bars represent the metrics before automation, while the light green bars show the improvements after automation. Each metric — processing speed, error rate, compliance, and scalability — improves significantly with automation (especially in processing speed and error reduction).

By implementing automated AP invoice coding, businesses can enhance accuracy, improve compliance, and free up resources for more strategic work.

Key Features of ExFlow for Coding Invoices

ExFlow is an AP automation solution purpose-built for Microsoft Dynamics 365 Business Central and Finance & Operations that takes invoice coding to the next level. Some of ExFlow’s automation features include:

ExFlow Features	Benefits of These Features
Automated GL Coding	Automatically apply GL codes based on rules or machine learning
Real-Time Tracking and Reporting	Get immediate insight into coding accuracy and bottlenecks
Multi-Currency and Multi-Language Support	Simplifies coding for global companies
Integration with Approval Workflows	Streamlines the approval process and ensures accuracy
Compliance and Auditing Tools	Ensures that coding practices meet regulatory standards

With ExFlow, you gain full visibility into your invoice data while ensuring that all your coding is accurate, up-to-date, and audit-ready. ExFlow is built right into Dynamics 365, offering a full solution from invoice capture to payment.

Streamline Your AP Invoice Coding: Get Started with ExFlow   

Mastering invoice coding is crucial for your business’s financial accuracy and operational efficiency. By adopting best practices, implementing automation, and using tools like ExFlow, you’ll minimize errors, save time, and improve overall financial reporting.

Ready to streamline your AP processes? Explore how ExFlow can enhance your AP department with automation that’s built right into Dynamics 365. Learn more about ExFlow for Business Central and Finance & Operations.